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Income tax nexus in the new economy: Third-party service providers

Inside Deloitte

In this article, the authors consider the state income tax nexus implications of the shift toward the remote delivery of goods and services as states more aggressively assert jurisdiction to tax. They focus on scenarios in which out-of-state companies rely on in-state services provided by third parties as well as the implications it may hold in the context of Public Law 86-272.


Long past are the days when companies could reasonably base nexus determinations on the location of property, payroll, and employee travel. Physical presence in a particular state and whether that presence was sufficient to give rise to an income tax filing obligation was a fairly consistent rule of thumb through the end of the 20th century.

However, technology and innovation have resulted in rapid changes to the national economy in the past 20 years, and companies can now reach their customers without ever physically setting foot in the state where the customer is located.

As a result, many states are seeking to assert their taxing authority over out-of-state companies regardless of whether those companies have a physical presence in the state. Application of what are generally referred to as economic presence nexus standards is increasingly common and may be based on the existence of some types of nonphysical activity in a state, including purposeful direction, active solicitation, and factor-based activity.

Equally significant is the scrutiny that states are giving to the in-state services provided by third parties to a taxpayer’s in-state customers that would create nexus if directly engaged in by a taxpayer and to services provided by third parties to the taxpayer itself that may or may not involve the presence of property owned by the taxpayer in the state.

Download the PDF to learn more.

​If you have questions regarding this edition of Inside Deloitte, please contact:

Mike Porter, principal, Deloitte Tax LLP

Alexis Morrison-Howe, senior manager, Deloitte Tax LLP

Jeremy Sharp, senior consultant, Deloitte Tax LLP

Laura Souchik, senior consultant, Deloitte Tax LLP

The authors thank Tom Cornett and Shona Ponda for their contributions to and review of this article.

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